Apple Wants 30%? When the Wind Changes – Adjust Your Sales

Apple’s announcement that in-app subscriptions are now available for content publishers and licensed resellers (magazines, newspapers, TV/video, music etc) – at the low-low price of 30% of revenue – has come quite a buzz in the blog-o-sphere and amongst our consulting team.

Our philosophy is simple—when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing,” said Steve Jobs, Apple’s CEO. “All we require is that, if a publisher is making a subscription offer outside of the app, the same (or better) offer be made inside the app, so that customers can easily subscribe with one-click right in the app. We believe that this innovative subscription service will provide publishers with a brand new opportunity to expand digital access to their content onto the iPad, iPod touch and iPhone, delighting both new and existing subscribers.”

Publishers who use Apple’s subscription service in their app can also leverage other methods for acquiring digital subscribers outside of the app. For example, publishers can sell digital subscriptions on their web sites, or can choose to provide free access to existing subscribers. Since Apple is not involved in these transactions, there is no revenue sharing or exchange of customer information with Apple. Publishers must provide their own authentication process inside the app for subscribers that have signed up outside of the app. However, Apple does require that if a publisher chooses to sell a digital subscription separately outside of the app, that same subscription offer must be made available, at the same price or less, to customers who wish to subscribe from within the app. In addition, publishers may no longer provide links in their apps (to a web site, for example) which allow the customer to purchase content or subscriptions outside of the app.

What is the impact on content publishers and resellers?

Apple is well aware of its dominance in the tablet market, and the decision to disable links and require pricing equal-to-or-less than other platforms (similar to Amazon Marketplace rules for merchant pricing) essentially forces publishers to comply, and to raise subscription pricing across the board if they want to leverage the App Store channel profitably.

Subscription content is already priced very competitively. For example, a one year subscription to Newsweek is just $10. A 30% levy on already thin margins is high enough to kill off undifferentiated content publishers who are already losing subscribers to the cornucopia of free content. And if they can’t pass the extra cost along to the iPad consumer, they have a Hobson’s choice: absorb the cost, or raise prices across the board and risk losing more subscribers.

For companies that aggregate, syndicate or distribute licensed content like Netflix, Pandora and Hulu, 30% is unfathomable. If you look at traditional media distribution models – for TV networks, film distributors or syndicators, most costs revolve around content acquisition. On the retail side of the equation, costs are usually negligible to actually profitable (as in the case of cable, satellite or movie theater carriage). So consumer costs for music and movies typically reflect costs for the distributor primarily on the acquisition side.

This has also been the case for online services – until now. Netflix paid for rights to redistribute video, and then got to transmit it for free, setting their margins and pricing accordingly. A 30% revenue share going to the final “retail” broadcaster – in this case, Apple – is pretty much unheard of in the history of media distribution. They would have no choice other than raising their retail price significantly, sparking a consumer revolt.

Though on par with the bite Apple takes from all other apps, most believe the commission is outrageous, unfair to content sellers, and ultimately bad for Apple (it’s vulnerable to antitrust lawsuits and platform defection).

What can be done?

It’s possible Apple might concede and eventually bring down commissions closer to the 10% Google’s One Pass is asking for, but until that happens (some say it’s wishful thinking) content publishers and distributors must decide how to navigate these waters. As a wise, anonymous quotester once said: “If you can’t change the direction of the wind, adjust your sails.” Apple may uphold its rules, but there are strategies for publishers beyond pulling out of Apple applications or raising prices across the board.

1. Kill the app. Invest in a great mobile website.

Embrace HTML5 and build a killer mobile web experience where users can consume your content on their iPads, iPhones, iPods, iWhatevers sans app. A great mobile app offers things your web site can’t (GPS, shake functionality, camera, barcode scanning, etc), but most “subscribe once, consume everywhere” apps for content don’t need additional functionality than what’s offered through the web. You can also encourage subscribers to “bookmark” your mobile site, so a desktop icon appears for your brand, just like a mobile app.

2. Push to get new subscribers before June 2011.

If you’re going to stick with the App Store (and play by its rules), hold out as long as possible before removing your external link to sign up online.

3. Consider non-financial incentives to subscribe through the web or other platforms.

Remember, Apple only wants its cut for in-app subscriptions. You can sign up an unlimited number of customers through the web. And like getting around MAP (manufacturer advertised pricing), there are other ways to sweeten the deal when faced with pricing restrictions.

If prices must be raised across the board, subscribers from the web and other platforms may receive bonus offers that Apple subscribers don’t – free gift such as a physical copy of the magazine or one month free of physical newspaper (okay, maybe not as attractive for digital content consumers!) Get creative with the incentives – you could team up with another publisher and offer cross-promotions, 3 months free of your partner’s service. It could ultimately expose you to more new customers and be profitable.

You cannot hyperlink within your app after June 30, and mention web incentives in-app at your own risk (Apple may frown upon that when reviewing your App). But you may be able to offset a price increase through non-Apple channels with incentives including promo codes, which don’t change the “advertised price.”

Apple App Subcribers are Only A Segment

To help shape your strategy, it’s important to understand how large your in-app subscription segment is. At this early stage, it’s hard to quantify (in-app subscriptions was just launched). You do have a few months’ grace period to measure what percentage of new sign ups come through the app. You may discover the percentage of in-app sign ups is small enough that you can absorb the revenue hit for the sake of “being everywhere” and offering customers the choice of how and where to subscribe.

There will always be segments, campaigns and distribution channels that drag down your conversion rates and profits. You have to understand the trade-off of keeping them in the mix, even if they are not profitable alone.

Consider the retailer who offers 20% discount coupons through its affiliates. An affiliate that refers a lot of new customers may earn the highest commission, say, 10%. That’s a 30% reduction in revenue, plus a physical item has to be picked, packed and shipped and carries a higher cost of goods than digital access to subscription content. A retail business could not survive if this were its sole customer acquisition method. Eggs must be spread across many baskets.

That said, Apple seems to believe it has the ability to bring attract new customers to content apps, but you may argue that nobody is going to sign up for Hulu because they discovered it through the App Store! The Big Mac may recruit the users for games and utility apps that improve the mobile phone experience, like Remember the Milk and Epicurious, but subscription content is more likely to be discovered through the web (including surfing the mobile web) and consumed on mobile devices as an extension of the web experience.

While I think it’s safe to say Apple’s being a bit sour here, a content publisher or licensed distributor does not need to jump ship just yet – rather read the stars (segmented analytics), watch the wind (Apple’s policies) and adjust its sails strategy for profitable subscription sales.

What do you think about Apple’s new policies for publishers? Please join the discussion in the comments.

About Elastic Path Software

This blog is brought to you by Elastic Path Software, a provider of digital commerce technology and expertise to enterprises selling digital goods and content such as Google, Time Inc, and Virgin Media. With more than 14,000 subscribers, it is the #1 ranked ecommerce blog by PostRank Analytics, #35 on AdAge's Power150, and a SEMMY 2009 and 2010 winner in the online marketing and general category.

The opinions expressed here are of the individual writers and do not necessarily reflect the views of Elastic Path.